Archive for Economics

Global economics: time to learn mandarin!

Posted in economics with tags , , , , , on August 8, 2011 by Tom Leatherbarrow

It was difficult to know how to react to the downgrade in US debt from its traditional AAA rating. My first reaction was to scoff at the idea that one of the ratings agencies could have the sheer nerve to do it, this is after all the same people who gave AAA ratings to stacks of sub-prime Mezzanine Credit Default Obligations.

As Paul Krugman put it in yesterday’s New York Times, “America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S&P…. played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.” Thank you Paul.

However, in fairness to S&P, who issued the downgrade, there is a very important point at the heart of their statement namely, “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges”. In other words, America is currently ungovernable at precisely the time when strong leadership is needed, witness the negotiations over raising the debt ceiling.

What was striking about much of my weekend reading was the extent to which the American public still view their debt problems in isolation, which can be easily solved by cutting taxes to stimulate growth, raising taxes to increase receipts to the Treasury or cutting Government spending. In all the discussions I read on the New York Times or Washington Post websites there was barely a mention of the sovereign debt problems in Europe or the potential implications of a US default or continued subdued economic performance.

Which leads me to ask two searching questions to which I do not have answers. Firstly, how can the dollar continue as the international reserve currency (the foreign currency which is held by central banks and other major financial institutions as a means to pay off international debt obligations) when it is clearly so politically and, as a result economically, dysfunctional?

Secondly, is this the moment when America begins to wake up and realise that it is unlikely to be top dog much longer and what effect will that have on the American psyche?

Certainly the rhetoric over the last few weeks has been extraordinary with Putin accusing the US of living “like a parasite” on the global economy and of being a threat to the worldwide financial markets. Rarely, if ever, has America been scolded in such terms.

However the real threat to America comes from China which is due to overtake the US as the world’s largest GDP sometime in 2016. As a client of mine put it last week, “the Chinese idea of an economic slowdown is GDP growth of 7-8 per cent, which is our idea of a boom.”

I don’t know where the rapidly unfolding events of the last few weeks will take us. Only one thing is certain, it’s too late for me, but I’m seriously considering getting my two children to learn mandarin!

UK Economy: these numbers are bad!

Posted in economics with tags , , , , on July 26, 2011 by Tom Leatherbarrow

Well, there is no hiding from this. Today’s numbers just released by the Office of National Statistics for the UK economy in the second quarter of 2011 are dire.

I’m all for being optimistic, but there is no escaping that the economy is flatlining. Economic activity increased by 0.2 per cent in the second quarter of 2011, following an increase of 0.5 per cent in the first quarter of 2011. In other words, it’s going backwards.

Total services output increased by 0.5 per cent in the second quarter compared with an increase of 0.9 per cent in the previous quarter (again backwards). The largest contribution to the growth in this quarter was from business services and finance with 0.7 per cent growth.

Transport, storage and communication increased by 1.1 per cent, compared with an increase of 2.5 per cent previously. The story is the same with distribution, hotels and restaurants which increased by 0.3 per cent, compared with an increase of 0.9 per cent.

The one bit of light is construction output which increased by 0.5 per cent in the second quarter, compared with a decrease of 3.4 per cent in the previous quarter.

From a personal point of view (in fact anybody involved in manufacturing PR or engineering PR should be worried) the bullish manufacturing statistics of the last few months appear to have stalled. Manufacturing decreased by 0.3 per cent compared with an increase of 0.7 per cent in the previous quarter.

Where do we go from here? The Chancellor is adamant that there is no Plan B but as one client said to me recently, “as soon as he admits there is a Plan B then Plan A is dead.” What is clear is that the increase in VAT, petrol prices and fear over hefty increases in domestic gas and electricity prices have all given the UK consumer a fright and we are reigning in our spending. In my opinion, there has also been too much talk of austerity measures and comparisons with Greece etal (yes our debt is of a similar size but our economy is six times bigger!).

The Chancellor has taken a gamble. The lesson of the Great Depression was that stagnant economies need to be inflated, which in turn brings more receipts back into the Treasury. Instead he has chosen to take money out of the economy at a critical time.

On such decisions careers are made and lost.

PS: there is a political angle to all of this as well. Today’s numbers play right into Ed Balls’ rhetoric that the Chancellor is in ‘growth denial’. Expect to see Ed all over the news today as he hammers home this point which, on the basis of these numbers, is likely to gain some traction.

UK Economy: tales from the front line

Posted in economics with tags , , , , , , , , on June 17, 2011 by Tom Leatherbarrow

In a sort of 21st Century version of Cobbett’s Rural Rides I have been meeting senior managers at companies across the UK. Some were clients, others were suppliers to clients, some were merely acquaintances, but the common denominator amongst them all was an almost desperate desire to talk about the state of the UK economy. Unlike Cobbett my trusty steed was a Seat Altea and my rides were more urban than rural but you get the gist – I’ve been out a lot.

I personally have three tests of economic vibrancy, namely traffic levels, “sold” signs and skips on my street. All three have been giving off conflicting messages recently, hence my interest in gauging the opinion of those on the front line with real P&L responsibility.

So what is going on out there? My first conversation was with a managing director of a premium priced organic healthcare products company which sells directly to consumers and through retailers. In his words, “we’ve dropped off a cliff”. Ahhh not good then!

In Solihull a chief executive of a financial services company which is strongly aligned to consumer spending patterns, admitted to me last week that things had slackened off but he remains optimistic, despite some inflationary fears. “The thing I have noticed is the price of eating out” he told me. “I draw the line at £25 for a steak. I told the wife to get the BBQ out instead.” However his view is that, rather than not buying at all due to increasing prices or concerns over the economy, consumers will take advantage of the vast range of different price points for products and trade down to cheaper items.

That’s the down-ish side, but a trip to Bedfordshire to meet the managing director of a drainage products company with strong ties to the construction sector painted a different picture. I naively offered the opinion that things were presumably difficult at the moment. “Oh no” he said, “we’ve just had a record-breaking 2010 and we are ahead of target for this year.” Noticing my double-take he went on, “we supply to commercial developments and they’re doing fine.”

I finished my grand tour in Worcestershire at a global machine tool builders which manufactures metal cutting machines for anything from £60k through to £2 million (big ticket items then!). Rarely have I seen a factory so busy. In the words of the harassed looking production manager, “we can’t make ’em fast enough.”

And this is not just a result of the weak pound sucking out exports. I’m told that UK sales are going great guns as well. One of his colleagues in sales offered this opinion: “I think a lot of our customers are taking the view “let’s just get on with it!”

What is clear is that the closer you are to the consumer the more difficult life is likely to be at the moment. If the UK economy is to stop flat-lining and return to growth we need more of that can-do attitude I saw in Worcestershire.

Unfortunately, Lord Young is probably right!

Posted in economics, Politics with tags , , , , on November 19, 2010 by Tom Leatherbarrow

The furor over Lord Young of Grafham’s comments over British standards of living are insensitive, likely to be viewed as Thatcherite and embarrassing to the Prime Minister – but he’s probably right!

For those not in the know, Lord Young is an unpaid adviser to the current Prime Minister having previously been at the Department of Trade and Industry under Margaret Thatcher. Beneath that kindly uncle exterior however lies an unreconstructed right winger who famously took on Norman Tebbit over the running of the 1987 Election Campaign. You’ve got to have some balls to do that!

Anyway, echoing Harold MacMillan’s famous words that “you’ve never had it so good” Lord Young has told the British public that historically low interest rates of 0.5 per cent mean that we are all paying back much less on our monthly mortgage costs which means that we’ve never had so much disposable income. As you can imagine, this has set off a right old battle with the current PM publicly distancing himself from the comments.

Intriguingly however, almost exactly the same argument was made to me by a client about a week ago, namely that low interest rates are a legal drug we are all going to have to wean ourselves off.

Why? Because the medium term risk is not a double-dip recession but inflation, due to the huge amounts of extra money that have been pumped into the economy, firstly via low interest rates and secondly by quantitative easing or printing money.

The traditional British blunt instrument for dealing with inflation has been higher interest rates which takes money out of people’s pockets. What are the timescales for this? Difficult to say but it is interesting to note that one member of the Bank of England’s Monetary Policy Committee voted in favour of a quarter point rise in rates at the last meeting.

Why then, if he is right, have his comments been received with such scorn? I suspect it’s because, despite the cash windfall many of us have chosen not to spend but to pay off credit card debts plus the state of the economy has left us worrying about job security. It may be that we have never had it so good, but unfortunately many of us are not feeling that great at the moment.

MPC Member: “We need to talk this up now”

Posted in economics with tags , , , on November 16, 2010 by Tom Leatherbarrow

Not my words but the words of one member of the Monetary Policy Committee to a client of mine a few weeks ago. The man in question, Andrew Sentance, is concerned that, despite all the ingredients being in place for economic recovery, we will manage to snatch defeat from the jaws of victory.

And he should be concerned if you look at today’s business pages dominated by the financial crisis (sorry ‘contagion’ must remember to be more hyperbolic) in Ireland.

However, it is noticeable that the negative news bias is increasingly bearing no relation to company and market performance. The FTSE 100 has moved up nearly 1,000 points since July and today’s company results show enormous progress across a swathe of sectors. EasyJet has seen profits triple in the last six months. ITV has seen revenues rise by 16 per cent due to an advertising recovery (yes you read that right, an advertising recovery!). Luxury fashion brand Burberry has reported a 49 per cent rise in first half profits. British Land reported a 4.2 per cent rise in net asset value.

These are all very positive results in sectors, namely luxury goods, air travel, property and advertising which have been, excuse my language, mullered in recent years.

So in my self-appointed role as the guardian of economic optimism, we need to heed Andrew Sentance’s words and start talking this up!

That sound you can hear is a script being torn up!

Posted in economics with tags , , , on October 26, 2010 by Tom Leatherbarrow

Today’s ONS statistics which detail a better than expected 0.8 per cent growth in the UK economy during July, August and September only confirms I suspect what most of us in the private sector have been quietly thinking for some time, namely “things are going quite well aren’t they?”

I’ve had chance to talk to a number of companies in the manufacturing sector (traditionally the poor relation of the British economy behind the financial and service sectors) in the last few weeks and the message has been very positive. Strong order book, good sales pipeline, nobody is getting ahead of themselves, but almost everyone is feeling good about their prospects. All this is confirmed by the ONS today which shows industrial production grew by 0.6 per cent in the third quarter. Now if manufacturing is doing well we must be doing something right!

Of course the elephant in the room is the potential impact of the Comprehensive Spending Review. As a subcontract manufacturer said to me last week “we’re doing well, but it’s fragile”. Like everyone else he is hoping that George’s cost cutting does not damage this upturn.

One last point and it is a topic I am unashamedly returning to, namely the fact that we could talk ourselves into another dip. The media has a negative news bias and I suspect many prepared doom and gloom scripts from correspondents standing outside the Treasury are being ripped up as I write this. Let’s hope they have to keep on ripping in the months ahead!

Could the media talk us into a double dip?

Posted in business, economics, Media with tags , , on July 26, 2010 by Tom Leatherbarrow

What is the biggest worry for business at the moment?  Lack of bank lending?  Austerity measures?  Public sector cost-cutting?  Well the answer is none of the above, at least amongst senior management at a number of firms I have talked to over the last few weeks.

Apparently, the biggest fear at the moment is the media.  How so?  Well there are concerns that media negativity about the state of the economy will hit consumer and business confidence, sending us into an economic tailspin when things for many are actually going quite well at the moment.  The word from two UK manufacturers I have spoken to recently is of strong sales, good pipeline and increasing confidence.  The feeling is that the both business and the public in general have held back investing for long enough and are now dipping into their pockets once again.  Of course this isn’t true of all sectors (the cuts to the school building programme were another knife in the back of the construction sector) but it is clear that consumer and business confidence are in reasonable health, which is good in the circumstances.

However, confidence is fragile.  I vividly remember having dinner with David Smith, economics editor of the Sunday Times a few years ago (namedropper, moi?) and he readily admitted that there is a bad news bias which can easily affect both business and consumers.  Therefore, at times like this I think we should all use our own judgment rather than just rely on the headlines.  Smith famously has his skip test to gauge economic activity (ie. consumer confidence is directly related to the number of skips in his road from people undergoing house renovations) while I look out for new cars on driveways, and ‘sold’ signs in front of houses.  At present both of these indicators are positive, at least where I live.

My gut feeling is that we will weather this (Friday’s GDP figures were another welcome boost) as most businesses are now very lean and we have stored-up demand due to the fact that nobody has spent anything over the last few years.  Barring major shocks, this should be enough to see the private sector through. 

The public sector is another matter entirely.  As one client put it to me a few weeks ago, “I think they are going to feel some of the pain the private sector felt 12 months ago.”


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